Law Has Lasting Impact on How Owners Run Firms

Many small businesses won a reprieve from having to provide health insurance under the Affordable Care Act until 2015 or later. But the law is already having a lasting impact on how lots of owners choose to run their companies.

Some owners have begun to weigh strategies that might help them avoid complying with the law later on, such as opting out of providing the required coverage and instead paying a federal penalty of $2,000 for each full-time worker after the first 30.

Others have begun restructuring their businesses, reducing their employees' hours, for example, or trimming their total head counts to fewer than 50 full-time workers.

"You've really got to run the numbers and find out what's going to work best for your bottom line," says Melinda Emerson, chief executive of Quintessence Group Inc., a small-business consulting firm in Philadelphia. "You don't want to wait and then have to make a drastic cost increase to your customers or make a significant reduction to your labor force" when the law's provisions take effect, she says. "You want to do that gradually."

In January, nearly half of small-business owners with at least five employees, or 45% of those polled, said they had had to curb their hiring plans because of the health law, and almost a third—29%—said they had been forced to make staff cuts, according to a U.S. Bancorp survey of 3,173 owners with less than $10 million in annual revenue that will be released Thursday.

To be sure, an estimated 5.4 million businesses with fewer than 50 full-time employees—accounting for 96% of all U.S. employers, according to the U.S. Small Business Administration—are largely exempt from many of the law's most stringent aspects. Larger ones got more time to comply when the Obama administration said in February that employers with 50-to-99 full-time workers won't have to meet the law's requirement that they provide insurance or pay a fee until 2016.

As part of its "Faces of the Affordable Care Act" multimedia feature, the Journal is profiling two small businesses—T. Cain Grocery Inc. of Fairhope, Ala., and retail and wholesale bakery Ovenly LLC of Brooklyn, N.Y.—and it will revisit them periodically to update readers on critical decisions they face or have made as they cope with the law.

While the grocer has 240 employees and the baker has a mere 27, they face similar challenges in figuring out how to broach the subject of health-care coverage with their employees, who as of this year must have health insurance to comply with the law's individual mandate or face a penalty. How many sign up is critical because it affects the companies' overall health-care costs and whether they may need to adjust their plans and the amounts they contribute toward premiums.

They are also finding out now that they may have to cope with rising premiums because of new taxes and new benefits.

More Enrollees, Higher Costs

Tommy Cain, age 62
Owner of T. Cain Grocery Inc.;
Fairhope, Ala.

Tommy Cain, whose family got into the grocery-store business in the 1930s, says his chain of five Piggly Wiggly stores now pays half of the insurance premiums for about 85 employees, up from roughly two dozen a year ago. The five stores he owns along the Gulf Coast employ 240 people.

Many of the new sign-ups are cashiers, shelf stockers and other lower-paid workers who elected to go on a second, lower-cost plan from Blue Cross Blue Shield of Alabama that the company added in the fall. The new plan has a $4,500 deductible and a $400 monthly premium, compared with a $500 deductible and a $950 monthly premium for the first plan.

Jon Robitaille, a 48-year-old beer and wine specialist, enrolled in the company's lower-cost plan in November to avoid being penalized under the health law's individual mandate. "I probably will do a checkup sometime this year just because I haven't done it in a while, but I typically don't go to the doctor," he says. "I'm a healthy guy."

Mr. Cain says he added the second plan mainly to get a jump start on complying with the health-care law. In February, the Obama administration announced that businesses with more than 99 workers could avoid some penalties next year by showing that they offer coverage to at least 70% of their full-time workers.

Now, Mr. Cain says he's worried that his company's health-care costs may become unmanageable. He's currently covering roughly 35% of his staff, which he says puts his total 2014 health-care expenses at about $290,000. He adds that many of the stores' workers are already covered under a spouse's plan. Indeed, Mr. Cain himself is covered by a state health plan through his wife, a retired schoolteacher, that he says he tapped a decade ago for surgery on a shoulder ailment brought on by years of unloading trucks. The others have chosen not to pay for coverage, "because they can't afford it," he says.

Some may change their minds by August, when Mr. Cain plans to open up the plans to all workers, including part-timers. But if the number of enrollees in his health plans increases to 70% of his workforce, Mr. Cain estimates his costs could swell to more than $500,000. That might force him to raise prices, he says, at a time when the impact of this year's harsh winter—and an extended drought in California—is already pushing up costs for fruit and vegetables. "The timing couldn't be worse, really," he says.

Offering Better but Costlier Coverage

Erin Patinkin, 34, and Agatha Kulaga, 34
Ovenly LLC ; Brooklyn, N.Y.

Erin Patinkin and Agatha Kulaga have only 27 employees and are thus exempt from having to provide coverage under the health law. Even so, they believe offering health insurance is critical to attract and retain top talent. The challenge: how to continue covering their staff despite rising insurance premiums under the law.

A federal actuarial report released in February predicts that 65% of employers with 50 or fewer full-time employees will see their health premiums increase.

Just seven people, including Ms. Patinkin and Ms. Kulaga, are on the company's two health plans, up from five employees in November 2013 when the entrepreneurs last renewed their policy.

Despite the slight difference in enrollees, the entrepreneurs expect their 2014 health-care costs to be at least $30,000 more than they were in 2013. That's because before the renewal, they offered only one, low-cost plan with a $1,200 deductible. Both co-owners have been healthy, though Ms. Patinkin sprained a wrist in 2011, which resulted in her having to spend nearly $2,000.

The premiums for their current plans, which don't have a deductible, cost at least $100 more a month than the premiums for the old plan. The company is also paying half of the premiums now, up from 25% earlier. The costs are $394 for singles enrolled in the Aetna Inc. plan and $597 for singles in the Oxford plan from UnitedHealth Group Inc.

Among the company's newest sign-ups is kitchen manager Johanna Jackson, who was dropped from her father's policy last week when she turned 26. Under the law, insurers are obligated to cover children on a parent's plan only up to that age.

Ovenly's vice president, Marianne Hamilton, also signed up for coverage after opting to drop the plan she had through her spouse's employer. She says she didn't like changes her husband's firm made to its policy, and she's now saving about $100 a month on health insurance.

Ms. Patinkin and Ms. Kulaga say their company's health-care costs could rise even higher for 2014 if more employees enroll in its plans during the months ahead. The entrepreneurs recently hired five people, all of whom will be eligible for coverage after a 90-day probationary period, plus they might extend job offers to about 10 more people this summer if they follow through on plans to open a second location.

They say they've so far been able to handle the added health-care costs because their company has been growing. Sales for the first quarter were up 40% compared with the same period in 2013. "The increased sales will offset the increased health-care costs," says Ms. Kulaga. "Hopefully we can continue to grow the business." Ms. Patinkin adds: "We don't want to stop offering insurance."

Ovenly's broker, Ralph Spagnuola, says he expects premiums for both of the company's plans to rise dramatically—about 20%—when they come up for renewal in November because they'll include new tax costs and benefits required under the health-care law, such as pediatric dental and vision coverage. He also says there will some changes to the plans themselves, with higher out-of-pockets for emergency care and hospital stays.